Tips on Tax Deductions for Charitable Contributions (III)

Deductibility Limitations to 501(c)(3) Groups

Individuals giving to 501(c)(3) organizations that are either public charities, private operating foundations, and certain private foundations may deduct contributions representing up to 50% of the donor's adjusted gross income if the individual itemizes on his tax returns. The 1986 Tax Reform Act, which become effective January 1, 1987, does not allow non-itemizers to deduct charitable donations on their federal income tax returns.

Individuals giving to 501(c)(3) organizations that are private foundations may generally deduct contributions representing up to 30% of their adjusted gross income. Corporations may deduct all contributions to 501(c)(3) organizations (regardless of foundation status) up to an amount normally equal to 10% of their taxable income.

501(c)(4)

Organizations that both perform a substantial amount of legislative lobbying on behalf of specific issues and primarily engage in social welfare activities may be classified under section 501(c)(4). Other organizations tax exempt under this section of the Internal Revenue Code include civic associations, some volunteer fire departments, and local associations of employees.

Contributions to 501(c)(4) organizations generally are not deductible as charitable donations, but they may be deductible as a business expense.

However, contributions to two types of 501(c)(4) organizations may be deductible as charitable donations:
* Volunteer fire companies and similar organizations, if the contributions are to be used for public purposes.
* Most war veterans' organizations, if 90% of the organization's membership is comprised of U.S. Armed Forces Veterans. Although a separate category-501(c)(19)-has been created for veterans' organizations, some still have a 501(c)(4) ruling.

501(c)(6)

Non-profit organizations ruled tax exempt under section 501(c)(6) of the Internal Revenue Code include business leagues, chambers of commerce, trade associations, real estate boards, and boards of trade. Contributions to 501(c)(6) organizations are not deductible as charitable donations for federal income tax purposes. Donations may be deducted as a business expense if they are "ordinary and necessary" in the conduct of the taxpayer's business.

501(c)(19)

A separately created category for veterans' organizations is the 501(c)(19) classification. Generally, contributions to 501(c)(19) organizations are deductible as charitable donations for federal income tax purposes if at least 90% of the members are war veterans. (Those veterans' organizations that still have a 501(c)(4) ruling are also eligible to receive contributions deductible as charitable donations.)

Tips on Tax Deductions for Charitable Contributions (II)

Organizations that Solicit Donations

Organizations that solicit contributions and memberships generally fall
into one of the following four tax exempt categories: 501(c)(3),
501(c)(4) 501(c)(6), and 501(c)(19). These numbers correspond to the
sections of the Internal Revenue Code that describe these organizations.

501(c)(3)

To obtain a 501(c)(3) tax exempt status, most nonprofit organizations
must file documents with the IRS that prove them to be operated for
certain charitable purposes specified by statute. (Older charities may
have a 101(6) ruling, which corresponds to section 501(c)(3) of the
current Internal Revenue Code.) Churches and small charities with less
than $5,000 annual income do not have to apply to the IRS for recognition
of exemption.

Organizations in the 501(c)(3) category include groups whose purposes are:

* Charitable
* Religious
* Scientific
* Educational
* Literary
* Preventing cruelty to children or animals
* Fostering national or international amateur sports competition
* Testing for public safety

Contributions to all 501(c)(3) organizations, except those that "test for
public safety," are deductible as charitable donations for federal income
tax purposes.

Foundation Status

While its 501(c)(3) status determines that an organization is eligible to
receive tax deductible donations, its foundation status determines the
limits of an individual donor's deduction.

The three principal classifications of 501(c)(3) organizations are as
follows:

A public charity (identified in IRS terms as "not a private foundation")
normally receives a substantial part of its income, directly or
indirectly, from the general public or from the government. The public
support must be fairly broad, not limited to a few individuals or
families. Public charities are defined in the Internal Revenue Code under
sections 509(a)(1) through 509(a)(4).

A private foundation, sometimes called a non-operating foundation,
receives most of its income from investments and endowments. This income
is used to make grants to other organizations, rather than being
disbursed directly for charitable activities. Private foundations are
defined in the Internal Revenue Code under section 509(a) as 501(c)(3)
organizations which do not qualify as public charities. A private
operating foundation is a private foundation that devotes most of its
earnings and assets directly to the conduct of its tax exempt purposes,
rather than to making grants to other organizations for these purposes.
Private operating foundations are defined in the Internal Revenue Code
under section 4942(j)(3).

Tips on Tax Deductions for Charitable Contributions (I)

One of the benefits of supporting a worthwhile cause is the ability to
take a federal income tax deduction in some cases. To help contributors
to nonprofit organizations understand which of their donations are tax
deductible and which are not, the Council of Better Business Bureaus
offers the following tips:

Tax Exempt vs. Tax Deductible

"Tax exempt" does not necessarily mean "tax deductible." A tax exempt
organization is one that does not have to pay income taxes. Contributions
made to certain tax exempt organizations may be deductible on the donor's
federal income tax return. While the Internal Revenue Service (IRS)
defines more than twenty different categories of tax exempt
organizations, contributions to groups in only a few of these categories
are tax deductible.

You can determine the tax exempt status of an organization either by
contacting the local office of the IRS, or by asking the organization for
a copy of its "Letter of Determination." A "Letter of Determination" is
the formal notification an organization receives from the IRS once its
tax exempt status has been approved. Also, IRS Publication 78, Cumulative
List of Organizations, is an annual listing of thousands of tax-exempt
organizations to which contributions are deductible as charitable
donations as defined in section 170 of the Internal Revenue Code.